It’s great to finally see the market rallying for reasons other than oversold bounces, headlines out of Europe, or just manipulation by the big money guys. Today we’re seeing some genuine optimism based on surprisingly strong numbers on the housing front. But is this rally sustainable?
My take on it is yes, this rally can be sustained- if the good news on housing is enough to tip the balance of money flowing out of equities. But that’s a big if.
Housing is an important piece of the economy, and numbers like we’re seeing today can’t be dismissed as just noise. But in order for the economy to gain traction, other important areas will have to start showing real progress too.
For example, the employment picture has been getting better for several months now, but it still hasn’t kicked into a gear that would be high enough to get people spending and investing again. A good employment report next month would potentially kick this rally into high gear in a more meaningful way.
So as much as we would like to become more bullish, our equity model is still flashing the yellow caution light – even with today’s action included. The S&P 500 would have to rally all the way to 1315 in order to get us out of the danger zone. While that’s certainly possible, it seems unlikely, given the long list of risks and headwinds that are still present.
There is a fair amount of short covering going on today, and once that action plays itself out, we’ll see whether or not the natural buyers have enough confidence to keep the rally going.